KNOWLEDGE DYNAMICS AND INNOVATION: CASE STUDIES IN A SPARSELY POPULATED AREA

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1 KNOWLEDGE DYNAMICS AND INNOVATION: CASE STUDIES IN A SPARSELY POPULATED AREA Harri Jokela*, Oulu Southern Institute, University of Oulu, Finland harri.jokela@oulu.fi Eija-Riitta Niinikoski, Oulu Southern Institute, University of Oulu, Finland eija-riitta.niinikoski@oulu.fi Matti Muhos, Oulu Southern Institute, University of Oulu, Finland matti.muhos@oulu.fi *Corresponding author ABSTRACT Purpose: This study describes the sources of essential for the innovation cases in three micro companies and analyses the dynamics in these cases. This study seeks to answer the following questions: What are the sources of essential for the innovation cases in the three micro companies selected? What kind of is required in these cases, and what phases can be identified in these innovation cases? These questions are answered through a multiple case study that uses the biography technique. Method: This is a multiple case study with holistic strategy. The unit of analysis is the innovation case. We analyse innovation cases in three micro companies operating in the Oulu South region. At the heart of the study is the biography technique, an innovative approach that provides a deeper understanding of dynamics in firms and regions. The empirical data was gathered through semi-structured interviews and public archives related to the case company. The interviews with key informants were mainly conducted face-to-face during fieldwork in The data was analysed using an inclusive and iterative process, and the main findings were summarised. Findings: We tracked the sources of essential for the three innovation cases and the dynamics of these cases were described by using the biography method. This study will serve as an interesting benchmarking tool for any public organisation that offers business services to companies. The findings suggest that public actors should pay more attention to the case-specific needs of innovative micro companies while developing their services. Value: In the future studies, it would be interesting to analyse more innovation cases using the biography technique and make comparisons among these cases. Keywords: Knowledge dynamics, biography, innovation, micro company, growth, Finland Category: Case study INTRODUCTION Knowledge is generally connected to innovation. In fact, changes in can be seen as the driving force behind innovation, and the general product/innovation lifecycle can be divided into generic phases, stages or states in multiple ways (e.g. Dean, 1950, Golder and Tellis, 2004, Markusen et al., 1986, Schutjens and Stam, 2003). This study aims to describe S6-257

2 the sources of that are essential for the innovation cases in three micro-companies located in Oulu South region and analyse the dynamics in these cases. The Oulu South region is situated in the southern part of Northern Ostrobothnia in Finland. This region is not a governmental unit or area but was formed to increase inter-municipal cooperation and development and to gain the required critical mass to ensure national and international competitiveness. The region comprises three subregions and 14 municipalities, with approximately 90,000 inhabitants and 4,600 active companies. Oulu South is one of Finland s main rural areas; however, because it offers sufficient employment to its inhabitants, it is known as the industrialised countryside. Furthermore, although the unemployment rate in this region is the lowest in northern Finland, it is likely to retain a large proportion of its younger population because it has the highest birth rate in Finland, despite the demographic challenge of widespread emigration from the region. This distinguishes the Oulu South region from other rural areas in Finland, many of which are dealing with significantly ageing populations. In this study, we investigate three innovation cases in micro companies located in the Oulu South region: Case 1. Development of a vertical lifting fabric fold-up outer door. Case 2. Development of a method to process and convert the ash generated by power plants to end-of-waste products. Case 3. Development of an internet application for electricity price comparison and contract rating. This study focuses on the dynamics of these three innovation cases to garner a better understanding of how is developed and transferred at a firm level. The aim of studying dynamics is to unravel the processes of interactions and to identify the types of actors that are involved in these processes. Therefore, we defined the following research questions: 1. What are the sources of that are essential for the three innovation cases? 2. What kind of is required and what phases can be identified in the three innovation cases? To address these research questions, multiple case studies were conducted. This was deemed the optimum approach for the purposes of our study. According to Yin (1989, p. 23), a case study is an empirical inquiry that investigates a contemporary phenomenon within its real-life context, when the boundaries between phenomenon and context are not evident and in which multiple sources of evidence are used. An essential part of this study was to conduct in-depth interviews with the key informants of each innovation case. Because this study deals with interactions among actors and particularly aims to evaluate exchange and development, this was deemed the best way to obtain considerable information regarding these processes. The information obtained through the interviews was analysed by predominantly using the biography technique. This study may enable public actors to ask essential questions for developing their services for micro companies, thereby fostering regional development and economic growth. According to Crevoisier and Jeannerat (2009, p. 1228), those regions that are capable of imagining their local activities within a global environment are categorized as innovative S6-258

3 regions. To be innovative, a region must be capable of matching its dynamics to the generation and utilization of. This study is made up of five sections. In the introduction, the background, motivation, research problem and research questions are presented. In the second section, the theoretical background of the study is presented, and a brief survey of the relevant dynamics, types and phases is conducted. In the third section, the method undertaken in this study is described. In the fourth section, a description and analysis of the data garnered in case studies are undertaken; these findings are then examined in light of the research questions. In the final section, a discussion of the main results and opportunities for further research is presented. KNOWLEDGE DYNAMICS Knowledge is widely regarded as a useful economic resource. In this context, it has been defined as the learning process in human brains, which is generated and used in personal and collective interactions in various contexts and uses given individual and firm competences to appropriate new and necessary economically useful (Dahlström and Hedin, 2010, p. 6). Therefore, is seen as both a resource and a process, both of which are linked to the interactions that occur among actors in the concept of dynamics. According to Strambach (2008, p. 154), the visible results of dynamics are innovations in products, services or processes. Knowledge dynamics can be understood as the dynamics that emerge from the processes of creation, usage, transformation, movement and diffusion of. Knowledge is not static; rather, it is constantly changing and dependent on context and application. For the purposes of this empirical case study, analytical, synthetic and symbolic were considered most relevant. Analytical is defined as research-based, which is developed through scientific exploration. Synthetic is considered a combination of analytical and (perhaps) symbolic. Engineering is a good example of synthetic, because it is derived from application and scientific research. Symbolic is largely recognised in research on cultural or creative industries. It deals with ideas, symbols and socially constructed commodities. It has been referred to as the about representation (Asheim and Coenen, 2006, Strambach, 2008). Knowledge types Analytical Knowledge Synthetic Symbolic Figure 1. Types of Science based Engineering E.g. advertising Knowledge phases seldom progress linearly. Usually, development progresses in such a way that various phases occur at the same time. In fact, there may even be loops between these phases. To understand the complexity of dynamics as a part of the process of innovation, the following three phases are examined in this study: exploration, examination and exploitation. S6-259

4 Knowledge phases Exploration Examination Exploitation Figure 2. Knowledge phases Search, including research E.g. trialling, testing, standard setting or benchmarking Commercialisation of innovation, sale on market, or socially useful/ used The exploration phase is often described as the first step in the chain. This phase usually involves searching for new or maintaining and developing existing. Examination is a testing phase in which the veracity and applicability of the is considered. Exploitation is regarded as a selling and using phase in which is applied to a situation in return for financial, status, position or recognition gains (Halkier et al., 2010, Strambach, 2008). METHODOLOGY We used a multiple case study with holistic strategy. The case study followed the process presented in Figure 1. Research design Results reporting Case selection Conclusions Theory: Knowledge dynamics Data collection protocol: Cases 1 3: Innovation of a micro company Case reports 1 3 Theoretical and pragmatic implications Knowledge biography Research report Figure 3. The research process The study analysed the process of innovation cases in three micro companies. The definition of a micro company (and SME) is different in different contexts. The US context, for example, offers many definitions of SME, depending on the industry. For example, in some industries, an SME is defined as any company having fewer than 500 employees. In the European context, an SME is defined as any company having fewer than 250 employees. The S6-260

5 same disparity applies to micro companies and should be taken into account when studying the SME-related literature. Ayyagari et al. (2007) cover this topic in their globally focused, statistical study on SMEs (p. 416): The term SME covers a wide range of definitions and measures, varying from country to country and varying between sources reporting SME statistics. Some of the commonly used criteria are the number of employees, total net assets, sales, and investment level. However, the most common basis for definition is employment, and here again, there is variation in defining the upper and lower size limit of an SME. Despite this variance, a large number of sources define an SME to have a cut-off of 250 employees. Because of the European context of this case study, we utilise the European definition. Within the SME category, the European Union defines medium-sized firms as having employees, small firms as having employees and micro-firms as having 0-9 employees (Storey, 2003). In this study, the empirical data was gathered through semi-structured interviews and public archives related to each company in question. Most of the interviews with key informants were conducted face-to-face during fieldwork. The questionnaires were designed to obtain information from the informants on various questions including the following: How did the innovation process develop from idea to product? What important interactions occurred during the development of the product? Who were the main actors involved in the development process? Where were they located? What type of did they contribute to the process? What core was involved in the genesis and development of this innovation? How did the core of the innovation arise and how was it developed? The biography technique an innovative approach that provides a deeper understanding of dynamics in firms and regions was used as the main technique for interpreting and analysing the data. The essential sources of for each innovation case were tracked, and interviews were used to obtain basic information regarding the time and space dimensions of the dynamics that occurred as a part of the cases. The biography technique permitted us to capture the diversity of the social environment of each firm to determine the precise manner in which was transmitted and information was exchanged from various partners inside and outside the firm (Dahlström and Hedin, 2010, p. 11). CASE STUDIES In this section, we describe the essential sources for the three innovation cases and analyse the dynamics in these cases. Moreover, the detailed biography of each innovation case is presented. The three innovation cases analysed in this study are as follows: Case 1. Development of a vertical lifting fabric fold-up outer door. Case 2. Development of a method to process and convert the ash generated by power plants to end-of-waste products. Case 3. Development of an internet application for electricity price comparison and contract rating. S6-261

6 Case 1 Innovation case 1 is the development of a vertical lifting fabric fold-up outer door. Based on the data obtained from the interviews, three innovation phases were identified: 1. First version, Product development, Marketing and internationalisation, 2005 Figure 4 illustrates the innovation phases and key interactions among the actors in case 1. The owner of the innovation remained the same (i.e. company 1) during the development process. Locations & actors: Finland Phase 1: First version ( ) Phase 2: Product development (years ) Phase 3: Marketing and internationalisation (years 2005 ) Company 1 Owner of the innovation Development and manufacturing first version of door by 2 main innovators, 1 coinnovator and other employees of the company. Development and manufacturing the following versions (Safety system, New method to install fabric, New frame material, Holistic electrical systems) by 2 main innovators, 3 co-innovators and other employees. Recruited 2 marketing and business experts one of which had also international experience. Concentration on doors, Change of trade name, International market research, New marketing activities, New information systems (ERP and 3D design), Certifications, Wind and burglary resistance tests. Recruited information system expert who had also international experience. Business Incubator Expertise in business planning Expertise in business planning Company 2 Expertise in strength calculation Company 3 Expertise in logic planning of control system Company 4 Expertise in aluminum profiles Company 5 Expertise in aluminum profiles National foreign trade association Expertise in internationalisation Europe Company 6 Company 7 Expertise in electrical systems Company 8 Expertise in electrical systems Figure 4. Knowledge biography of innovation case 1 Valuable about customer requirements from first big international client company = Private = Public The idea was based on the following question posed by one customer in 1993: Could you make us an outer door with a basic structure that is similar to your indoor divider wall? Two main innovators made a plan for modifying the divider wall to outer door. Subsequently, the first version of outer door was manufactured and sold to the customer in The entire planning and manufacturing process was completed by the staff of company 1 in phase 1. The employees of company 1, who had considerable experience in manufacturing tailor-made sunblinds, sunshades and divider walls, contributed the most important to the development process. In phase 2, the expertise of several external experts was introduced to the process. In phase 3, internationalisation expertise was introduced to the development process by a public organisation and regarding customer requirements was introduced to process by the first big international client companycase 2 S6-262

7 Innovation case 2 is the development of a processing method for ash from power plants. Based on the data obtained from the interviews, three innovation phases were identified: 1. Ideation, Product development and marketing, Commercialisation, 2012 Figure 5 illustrates the innovation phases and key interactions among the actors in case 2. Two individuals (i.e. the main innovators) were the owners of the innovation in phase 1. Subsequently, the company (i.e. company 1), which was founded in 2009 by the main innovators, was the owners of the innovation. Locations & actors: Finland Company 1 Owner of the innovation Company 2 Phase 1: Ideation ( ) Idea and method development by 2 main innovators. Phase 2: Product development and marketing (years ) Device development, Letters of intent with power plants, Acquisition of external funding, Staff recruitment. Expertise in mechanical engineering Phase 3: Commercialisation (years 2012 ) Device development, Succeeding in Nordic innovation competition, Main innovators resigned from the company board, Innovation process was stopped because of serious administrative and financial problems. Company 3 Expertise in mechanical engineering Expertise in mechanical engineering Council of region Public financing of 2 development projects Funding Agency for Technology and Innovation Public financing from the national accelerator program for young innovative companies (program included venture capital possibilities) On the basis of the information obtained from main innovators, agency interrupted the program because of possible misuse of public funding in company 1 Venture capital company 1 Venture capital company 2 Company became minority shareholder on condition that it got a right of veto in the company board Company became minority shareholder on condition that it got a right of veto in the company board Venture capital companies used their power on decision and did not take account the opinions of main innovators (=majority shareholders) in company board, which resulted in making disadvantageous decisions from the innovation s point of view A number of researchers from universities and research institutes Expertise in analysing characteristics of nutrient solution Figure 5. Knowledge biography of innovation case 2 = Private = Public The innovation idea was based on a research that was initiated in the 1960s on the utilisation of ash in forest fertilization by one of the main innovators. In 2002, he asked the other main innovator to help him commercialise the nutrient solution, which he had been successful in separating from ash. The other main innovator immediately noticed the business possibilities associated with possessing expertise in ash processing. Subsequently, the main innovators independently began developing the method of ash processing in phase 1. The objective was to create a method and device that enables the processing and conversion of ash to end-ofwaste products. The Ash generated by power plants is classified as waste, which causes significant waste handling costs for power plants. The most important was introduced in the development process by the two main innovators, one of whom had significant working experience in the research sector. The other S6-263

8 main innovator had considerable and varied experience in business, development and planning. He had a many-sided education and had also made 15 patented inventions. External experts mainly participated in the process in phase 2 when the construction of the device was in progress. Public actors participated to the process mainly by financing the development of the method and device. In this case, the influence of the venture capital companies was especially noteworthy. The venture capital companies displaced the main innovators from the operational decision-making in the board of the company 1, which caused serious administrative and financial problems and at the end the failure of the entire development process. Case 3 Innovation case 1 is the development of an internet application for electricity price comparison and contract rating. Based on the data obtained from the interviews, three innovation phases were identified: 1. Ideation, Product development, Commercialisation, 2013 Figure 6 illustrates the innovation phases and key interactions among the actors in case 3. One individual (i.e. main innovator) was the owner of the innovation in phase 1. Subsequently, the company (i.e. company 1), which was founded in 2010 by the main innovator, was the owner of the innovation. Locations & actors: Finland Company 1 Owner of the innovation Phase 1: Ideation ( ) Idea development by the main innovator. Phase 2: Product development (years ) Product development. Acquisition of external funding and expertise. Phase 3: Commercialisation (years 2013 ) Marketing activities. Acquisition of external funding and expertise. Company 2 Expertise in electricity sector Entrepreneur became shareholder Business Incubator University of Applied Sciences Expertise in business planning Expertise in requirement specification, software design, database programming and business know-how Contacts to private sector associations Expertise in business know-how and marketing events University Expertise in consumer behavior and price information Two researchers became shareholders Expert Expert Expert became shareholder Expertise in international marketing and business Expert became shareholder Expertise in international marketing and business Foundation for inventions Figure 6. Knowledge biography of innovation case 3 Expertise in protecting and developing innovations = Private = Public S6-264

9 Knowledge types The main innovator got the idea of developing an internet application for electricity price comparison and contract rating in 2007 while working in a company that operated as an electricity supplier. At the time, the public believed that traditional internet applications for electricity price comparison only provided a minor benefit to the consumers. This belief of the public gave the innovator the insight that the criteria for price formation in the electricity sector are very non-transparent for customers. The main innovator also noticed that there was no internet service in the market that transparently presents the criteria for electricity price formation and contract rating. The main innovator independently developed the idea further in phase 1, after which he resigned from his job and founded a new company (i.e. company 1). The most important was introduced in the development process by the main innovator, who had extensive and varied working experience in the electricity sector and was a certified electronics technician. In phases 2 and 3, several external experts brought manysided expertise to the process. Public actors played an important role, especially in phase 2. DISCUSSION This study described how the innovation process develops from the conception of an idea to a product in three innovation cases and analyses the dynamics within those processes. The detailed biographies of the three innovation cases, as presented in the previous chapter, answered research question 1. Figures 7 9 briefly answer research question 2. In Figures 7 9, the innovation processes occur within a framework of types and phases (See Figures 1 and 2), according to the theoretical analysis conducted in this study. Exploration Examination Exploitation Analytical Knowledge Phase 2 Synthetic Phase 1 Symbolic Phase 3 Figure 7. Case 1: The phases of the innovation process, projected through types and phases In case 1, during the first phase of the innovation process (first version), synthetic was essential and all the phases (exploration, examination and exploitation) were identified. The entire planning and manufacturing process was done by the staff, which had extensive experience in tailor-made manufacturing. The first version of the door was manufactured straight to the customer, which means that no prototypes were made. The second phase (product development) was an examinative and exploitative phase in which both analytical and synthetic was essential. External expertise was necessary when the door improvements were in progress. Two marketing experts were recruited by company 1 in phase 2, which accelerated the innovation process. The third phase S6-265

10 Knowledge types Knowledge types (marketing and internationalisation) was an examinative and exploitative phase and all types were essential. External expertise was especially required in internationalisation activities. One expert was recruited in phase 3 to help in planning and using the new information systems. Knowledge phases Exploration Examination Exploitation Analytical Knowledge Phase 1 Synthetic Phase 2 Symbolic Phase 3 Figure 8. Case 2: The phases of the innovation process, projected through types and phases In case 2, the first phase of the innovation process (ideation) was clearly an explorative phase in which both analytical and synthetic was essential. The main innovators were successful in independently developing the idea further because they had many-sided working experience and education. In the second phase (product development and marketing), synthetic was essential and all the phases (exploration, examination and exploitation) were identified. External expertise was required for device development and construction. The business experience of the other main innovator was useful when negotiating about letters of intent with power plants in phase 2. The third phase (commercialisation) was an examinative and exploitative phase in which synthetic and symbolic was essential. In phase 3, the peculiar behaviour of the venture capital companies resulted in the failure of the entire development process. Knowledge phases Exploration Examination Exploitation Analytical Knowledge Synthetic Symbolic Phase 1 Phase 2 Phase 3 Figure 9. Case 3: The phases of the innovation process, projected through types and phases In case 3, the first phase of the innovation process (ideation) was clearly an explorative phase in which both analytical and synthetic was essential. The main S6-266

11 innovator was successful in independently developing the idea further, because he had manysided about the electricity sector. The second phase (product development) was much more complex; it was an examinative and exploitative phase wherein all types were essential. External experts introduced important to the process, especially for the planning and programming of the application. The third phase (commercialisation) represents the exploitative phase. In this phase, symbolic and synthetic was decisive. In this phase, external experts introduced important business and marketing to the process. In cases 2 and 3, the owner of the innovation was a young company, which partially explains the fact that public actors and public funding were more important in the innovation process in these cases. The owner of the innovation in case 1 was an old company, which acted independently during the process. In case 1, other companies provided a large part of the expertise that was required during the process and numerous public actors were involved. In cases 2 and 3, the companies made several prototypes of the product; however, in case 1, the company manufactured the first version of the door straight to the customer. Despite the differences in the three cases, the basis of the innovations in all the three cases was the extensive working experience of the main innovators. It is also noteworthy that in all three cases, the companies naturally collaborated with the actors outside their home region. The findings of this study suggest that while developing their services, public actors should pay more attention to catering to the case-specific needs of innovative micro companies. The results of this study show how micro companies can function effectively with limited financial and human resources. In future studies, it would be interesting to use the biography technique to examine more innovation cases in micro companies. We hope to refine and develop this technique and subsequently apply it to future studies. We also suggest that future research examines the results of similar analyses made in micro companies in other countries. ACKNOWLEDGEMENTS This study is an essential part of the Entrepreneurship Research and Development of RDI in Oulu South Region project. The authors are grateful for the project funding supported by the Council of Oulu Region, the Kerttu Saalasti Foundation, the Nivala-Haapajärvi subregion, the Ylivieska subregion, the Haapavesi-Siikalatva subregion, the Central Ostrobothnian University of Applied Sciences, the Educational Municipal Federation JEDU and the European Regional Development Fund. We highly appreciate the organisations and persons involved in the study who shared their experiences. REFERENCES 1. Asheim, B.T., and Coenen, L. (2006), Contextualising Regional Innovation Systems in a Globalising Learning Economy: On Knowledge Bases and Institutional Frameworks, The Journal of Technology Transfer, Vol. 31 No. 1, pp Ayyagari, M., Beck, T., and Demirguc-Kunt, A. (2007), Small and medium enterprises across the globe, Small Business Economics, Vol. 29 No. 4, pp Crevoisier, O., and Jeannerat, H. (2009), Territorial Knowledge Dynamics: From the Proximity Paradigm to Multi-location Milieus, European Planning Studies, Vol. 17, No. 8, pp S6-267

12 4. Dahlström, M., and Hedin, S. (eds.) (2010), Regional Trajectories to the Knowledge Economy Nordic-European Comparisons, Nordic Innovation Centre, Oslo. 5. Dean, J. (1950), Pricing Policies for New Products, Harvard Business Review, Vol. 28 No. 6, pp Golder, P.N., and Tellis, G.J. (2004), Growing, Growing, Gone: Cascades, Diffusion and Turning Points in the Product Life Cycle, Marketing Science, Vol. 23 No. 2, pp Halkier, H., Dahlström, M., James, L., Manniche, J., and Smed Olsen, L. (eds.) (2010), Knowledge Dynamics, Regional Development and Public Policy, Department of History, International and Social Studies, Aalborg University, Ålborg. 8. Markusen, A.R., Hall, P., and Glasmeier, A. (1986), High-tech America: The What, How, Where and Why of the Sunrise Industries, Allen & Unwin, Boston. 9. Schutjens, V., and Stam, E. (2003), The Evolution and Nature of Young Firm Networks: A Longitudinal Perspective, Small Business Economics, Vol. 21 No. 2, pp Storey, D.J. (2003), Entrepreneurship, Small and Medium Sized Enterprises and Public Policy, in Acs, Z.J., and Audretsch, D.B. (eds.), Handbook of Entrepreneurship Research, Dordrecht, pp Strambach, S. (2008), Knowledge-Intensive Business Services (KIBS) as Drivers of Multilevel Knowledge Dynamics, International Journal of Services Technology and Management, Vol. 10 No. 2, pp Yin, R.K. (1989), Case Study Research: Design and Methods, Sage Publications, Beverly Hills. Harri Jokela is a Researcher at the Oulu Southern Institute at the University of Oulu. He has an MSc in Agriculture and Forestry. His primary interest areas are the development of microcompanies and small- and medium-sized enterprises (SMEs) in rural areas and regional development. In recent years, he has been involved in many projects in the area of regional development. Eija-Riitta Niinikoski is a Development Manager at the Oulu Southern Institute at the University of Oulu. She has an MA in Theology. Her primary interest areas are regional development, the role of higher education institutions in regional development, internationalization processes and the development of micro companies and SMEs in rural areas and the management and leadership of expert organizations. Niinikoski has been responsible for many development projects; she has also been involved in several international projects. Dr Matti Muhos is a Research Director at the Oulu Southern Institute at the University of Oulu. He has a Doctoral degree in Industrial Engineering and Management, and he participates in the editorial processes of several international journals. His primary research areas are growth and internationalization of technology-intensive SMEs, including configurations and management viewpoints, development of micro-companies and SMEs, technology-intensive companies, agility, internationalization processes for SMEs and technology management. Muhos has worked on several international projects and has written over 60 publications in the form of journal articles, book contributions, refereed conference papers and technical papers. S6-268